Jeb Bush, Cocaine and the InnoVida Scandal

"... Several top InnoVida officials have checkered pasts. One of the company's owners was convicted of cocaine trafficking in 1990. A decade earlier, a future b

"... Several top InnoVida officials have checkered pasts. One of the company's owners was convicted of cocaine trafficking in 1990. A decade earlier, a future board member was busted, accused of trying to board a flight from Fort Lauderdale, Florida, with a pound of cocaine in his underwear and another pound in his bag. ..."

Also see: Jeb Bush’s Ethical Blind Spot

Jeb Bush missed red flags in Florida business scandal

Miami (CNN) There were plenty of red flags surrounding the company Jeb Bush was planning to join: lawsuits, bad headlines, even previously convicted drug dealers in top positions. But somehow Bush seemed to miss them all in 2007 as he prepared to join InnoVida as a $15,000-a month-consultant -- a position that would lead to board membership and stock options.

Just months out of the Florida governor's mansion, the consulting gig with InnoVida would help Bush replenish his bank account after eight years in public service. It was also a chance for him to lend the credibility that comes with being the son of a former president and the brother of a sitting one to a home state start-up making what promised to be a revolutionary new building material.

But in reality, Bush was getting caught up with a smooth-talking CEO who would ultimately be sent to prison for more than a decade for running a $40 million investment fraud. Bush's ties to InnoVida and chief executive Claudio Osorio are resurfacing as the former governor considers a White House run.

A CNN investigation uncovered a paper trail revealing a pattern of financial malfeasance allegations against Osorio and troubling accusations against his top lieutenants, raising questions about why Bush would associate with businessmen who have such disconcerting histories. Bush's work at the troubled company is all the more notable considering he's built a political career touting his business acumen, boasting to voters in Iowa recently that he's actually "signed the front side of a paycheck."

"It's hard to imagine any due diligence investigation that would have missed lawsuit after lawsuit against Osorio alleging fraud, misrepresentation and ethics violations," said Ken Boehm, the chairman of the National Legal and Policy Center, an ethics watchdog group that reviewed public records with CNN. "Even if they were doing due-diligence lite, they would have found the lawsuits. These lawsuits weren't hidden. They were in his home county."

Elite circles

Osorio traveled in elite circles. At political fundraisers and events at his multimillion-dollar Miami mansion, he chatted up the rich and famous, persuading them to invest millions in his company. He had the look of a successful entrepreneur, complete with a Colorado mountain house and a Maserati.

He even tried talking his way into the Oval Office, but had to settle for a 2009 meeting with President Barack Obama's personal assistant, according to court filings.

Osorio recruited Bush to the company because the political heavyweight would, as the Securities and Exchange Commission's complaint put it, "add an air of legitimacy to InnoVida."

Bush has never been accused of wrongdoing. He paid back more than half the $470,000 InnoVida paid him over his three years as a consultant and maintains Osorio deceived him and other board members.

"It is now obvious that Mr. Osorio deliberately misled a board of prominent business leaders about his company's dealings and that is why he is now in jail," Bush spokeswoman Kristy Campbell told CNN in an email.

Campbell has previously told reporters that Bush vetted the company before signing on as a consultant, visiting its factories in Miami and Dubai. And she told CNN that Bush hired a former federal law enforcement agent to conduct a background check on Osorio, which found "no red flags indicating criminal or financial wrongdoing."

It's a confounding explanation considering the allegations of shady dealings that had dogged Osorio and his associates for years.

Checkered pasts

Several top InnoVida officials have checkered pasts. One of the company's owners was convicted of cocaine trafficking in 1990. A decade earlier, a future board member was busted, accused of trying to board a flight from Fort Lauderdale, Florida, with a pound of cocaine in his underwear and another pound in his bag.

Before Bush started working at the company, at least three lawsuits were filed against Osorio that accused the businessman of financial wrongdoing and unethical behavior.

The most high-profile suit against Osorio was a 1999 class action he faced as chief executive of a Fortune 500 company called CHS Electronics. Shareholders sued Osorio, alleging securities fraud after the company collapsed.

In a foreshadowing of InnoVida's collapse, shareholders sued CHS and its executives, accusing them of misleading investors, artificially inflating CHS' stock price, overstating profits and income and fraudulently reducing expenses. The suit accused Osorio of personally manipulating the company's financial statements to show a profit, a practice referred to internally as "Claudio's magic."

Osorio and other CHS executives settled the suit for almost $12 million, but admitted no wrongdoing.

In another example, Osorio started a venture in 2002 to sell video game accessories. Two years later, his business partner sued Osorio, accusing him of lying about his intention to fund the venture and mismanaging it. A jury eventually ordered Osario to pay $2.2 million.

Perhaps the strangest allegations against Osorio came in a 2006 lawsuit. In that case, he reportedly made a deal with a company to sell computer terminals overseas. The lawsuit said the equipment was shipped but Osorio never paid up. The company even accused him of trying to steal computer terminals as they sat in port.

Beginning to unravel

As things began to unravel for Osorio, he filed for personal bankruptcy. Court papers filed after Bush left the company show "the Osorios were insolvent on April 25, 2007" -- more than six months before he would sign on as a consultant to InnoVida.

InnoVida's books mirrored Osario's troubled personal finances.

The criminal indictment against Osorio said "InnoVida was not financially sound and profitable, and did not generate sufficient profits between 2007 and 2011," which covered most of Bush's tenure on the board.

Osorio had more basic problems than aggrieved former business partners and angry shareholders -- he couldn't even pay the rent.

Nine months before Bush joined InnoVida, a judge evicted the company from its factory space, ordering the sheriff to clear everyone from the premises, according to court filings. The judge dismissed the case in June 2008, but gave the landlord the right to take InnoVida back to court if it fell behind on rent again.

Some of Osorio's closest associates left paper trails that traced back decades.

Craig Toll was InnoVida's chief financial officer, who would later go to prison for four years for his part in the company's scam. He was also the CFO at CHS Electronics, where he was accused by shareholders of signing false and misleading quarterly reports.

CHS shareholders leveled the same accusation against executive Antonio Boccalandro. After CHS collapsed, he and Osorio went on to form a holding company called Miami Worldwide Partners, which paid Bush for some of his InnoVida consulting work.

Before Engin Yesil invested more than $8 million in InnoVida and became a part owner, he sold cocaine. He was arrested, pleaded guilty and was sentenced to six years in prison.

As a medical student in the 1980s, future InnoVida board member Harlan Waksal was busted in the Fort Lauderdale airport, accused of trying to smuggle 2 pounds of cocaine. Police said he jammed half of it in his underpants and put the remainder in his luggage. His conviction was eventually overturned after a court ruled he had been illegally searched.

Decades later, Waksal made national headlines when the company he co-founded, ImClone Systems, was rocked by an insider trading scandal that ensnared Waksal family friend and DIY queen Martha Stewart, sending her to federal prison.

Even with all the lawsuits, criminal records and scandals in public view, Bush still joined InnoVida.

Bush's work

It's not clear what exactly he did for the company as a consultant and how much oversight he provided as a board member. Campbell, the Bush spokeswoman, didn't respond to questions about his consulting work. When he agreed to pay back more than half his consulting fees, the settlement depended on a nondisparagement clause that kept the details secret.

Court papers show part of his consulting work included "sales and marketing" and that he negotiated a finder's fee for landing investors in Nigeria, Mexico, South Africa and Florida. Campbell said Bush never collected those fees.

Bush's paychecks came from two Osorio-controlled companies, InnoVida and Miami Worldwide Partners. The financial lines between the two were blurred, with Osorio using Miami Worldwide to transfer InnoVida money to his personal bank account. Miami Worldwide didn't file its taxes during Bush's tenure.

During much of Bush's tenure, Osorio transferred millions of dollars from InnoVida to Miami Worldwide at a time when InnoVida's companies were not paying their payroll taxes, liability insurance or rent. InnoVida's payroll taxes added up to more than $100,000, according to court filings.

Campbell said Bush was not aware of the companies' tax problems.

Meanwhile, Osorio continued to swindle investors during Bush's tenure.

He convinced a Tanzanian businessman to invest $2 million to build "floating homes," a project that sank. He persuaded NBA player Carlos Boozer to invest $1 million in InnoVida and use his friendship with Obama's assistant, Reggie Love, to score the White House meeting.

Scamming the government

Osorio even scammed the government. In 2010, InnoVida received about $3 million from OPIC, a government agency that helps American companies do business in developing countries. Instead of building a manufacturing plant and homes in Haiti after the earthquake, as InnoVida promised, Osario pulled another bait and switch and used the money to pay investors and himself.

As a board member, Bush did have at least a few questions for management. Not long after a company board meeting in 2009, he emailed Toll, InnoVida's chief financial officer.

"Your offer to send me the cash flow information on the company would be greatly appreciated," Bush wrote, adding that he'd like to also see the company's liability insurance.

Toll replied and attached an "unaudited cash flow statement" and told Bush he'd forward the insurance policy as soon as he got it.

Bush never got the audited financials and it appears he never received a copy of the insurance policy, possibly because the company may have never had insurance. Insurance paid for the almost $12 million settlement in the shareholders lawsuit against CHS Electronics, so it may have been difficult for Osorio and Toll to insure InnoVida.

Audited financial statements are routinely relied upon by investors, board members and others to assess a company's financial health, but Bush never received them.

More than once, Bush said the board needed to see audited financials, but the board never got them, Campbell said. Osorio's explanations for why they weren't forthcoming, "seemed plausible at the time," she said.

Confrontation

Bush was concerned with how slowly the company provided information to the board, Campbell said. When a board member raised additional concerns with Bush, the governor worked to address them in what ultimately culminated in a confrontation between board members and Osorio, she said. Three days after that September 2010 meeting, Bush cut ties with Osorio and InnoVida, citing concerns over how the company was run, according to court documents.

On the way out the door, Bush urged Osorio "to adopt more professional, transparent business practices, including obtaining audits by a national accounting firm," according to court papers.

The admonition came too late. A few years later, Osorio would be in prison.

Jeb Bush and a giant Ponzi scheme: Did the GOP candidate help a Miami hustler defraud his shareholders?

Originally published at The Washington Spectator

e collapse of InnoVida Holdings LLC in 2011 didn’t get much traction in the media. Except in South Florida where a small group of investors lost more than $40 million on a scheme to market hurricane- and earthquake-resistant homes assembled from prefabricated plastic panels. The company CEO had promised a highly publicized roll-out in Haiti followed by expansion into more lucrative markets. Neither ever occurred.

Even in South Florida, the story had receded into endless litigation (with more than 1,000 pleadings filed in bankruptcy and civil proceedings). It resurfaced in The New York Times in April, because it involved former Florida Governor Jeb Bush, who is emerging as the preferred 2016 presidential candidate among establishment Republicans who consider New Jersey Governor Chris Christie unelectable.

Bush was both a director on the corporate board and a marketing consultant for InnoVida Holdings LLC while it was the subject of a criminal investigation that sent its two top executives to jail.

The Times surveyed business dealings Bush pursued after leaving office in 2007. He had returned to the private sector with a modest net worth of $1.3 million, lagging behind his brothers. George W., for example, made $14 million on the sale of his partial ownership of the Texas Rangers while he was governor of Texas. Jeb, the Timesreported, scrambled to make up for time lost while governor and had earned $3.2 million since leaving office.

There is much more to Jeb Bush’s role in the InnoVida scam, which wiped out every dime of shareholder wealth, than theTimes reported. Bankruptcy documents, a lawsuit filed by the Securities and Exchange Commission, and filings in criminal and civil cases suggest an ethical blind spot that led Bush to ignore the fact that the book value and returns reported by InnoVida executives were impossible under any reasonable set of financial assumptions.

Corporate board directors have a fiduciary responsibility to shareholders whose interest they represent. Bush endorsed a company that defrauded its shareholders and the government while failing to deliver its product to market.

“Corporate Ponzi scheme”

Before the indictment and bankruptcy, InnoVida was a quintessential South Florida story unfolding on the business and lifestyle pages of the Miami Herald. An extravagant and strikingly handsome South American CEO, arts patron, and political donor hosting A-List parties in a $12 million waterfront mansion on Star Island, a gated community on a man-made island in Biscayne Bay. The Venezuelan-born Gatsbyhad a $75,000 speedboat at the end of the dock. And a Maserati in the garage. He was also a major Democratic Party donor.

Claudio Osorio is now Inmate #01273-104 at the Miami Federal Detention Center. A bankruptcy trustee sold the property rights to his resilient plastic panels to a Brazilian company. Forensic accountants continue to search for funds in offshore banks. And investors are asking what became of $40-$50 million they staked on a company that promised turnkey prefabricated residential units assembled in one day.

Osorio, it turns out, was damaged goods long before Bush signed on. An unnamed Bush aide told the Times that he had done a background search on Osorio and found one bankruptcy but “nothing to suggest wrongdoing.”

Before the bankruptcy that the aide referred to, Osorio’s CHS Electronics was in federal court in Miami, defending itself against class-action suits by shareholders who claimed the company had engaged in securities fraud. Several of the shareholders’ suits were consolidated in 1999, and in 2001 a bankruptcy judge in Miami used proceeds from insurance policies that had been purchased by the company’s board of directors and officers to pay shareholders $11,750,000, according to court records.

Those records were available to anyone doing a background research and should have been a red flag regarding any Claudio Osorio business venture.

An attorney who would later sue Osorio told me that, “This is a small world down here,” and that it would almost require “willful ignorance” to miss the paper trail of litigation that led to Osorio’s corporate suite.

Offshore Alert’s financial database later published a report linking Osorio to potential criminal activities in Switzerland:

“Claudio Osorio Rodriguez et al. Application for the appointment to collect evidence for a criminal investigation in Switzerland into Claudio Eleazar Osorio Rodriguez, Marc Schurtz, John Metzger, William Ferrero and Andre Tinguely into alleged fraud and forgery regarding the bankruptcy of CHS Financial Suisse SA in May 2000.”

Seven years before he invited Bush to join InnoVida’s corporate board, Osorio was pursuing a $200-million loan in Switzerland with what was alleged to be a fraudulent application.

But the more critical story played out in federal courts in the Southern District of Florida, where plaintiffs claimed that Osorio submitted false financials based on forged documents and fake orders. And that CHS Electronics had reported near-impossible increases in profits—from $1.34 million to $4.7 billion in a four-year period. After attorneys for shareholders discovered widespread accounting irregularities, stock value evaporated and the company’s remaining assets were parceled out to creditors in bankruptcy court.

What happened at CHS foreshadowed what would happen at InnoVida. The same patterns and practices that resulted in the loss of all shareholder value at CHS would be repeated seven years later.

David Nunez, a Florida lawyer who represented several shareholders who together lost more than $5 million when InnoVida collapsed, said there was a lack of corporate due diligence.

“There’s nothing wrong with filing bankruptcy,” Nunez told me. “But if you had done your research, you would have learned that this guy [Osorio] took a multi-national company into bankruptcy after he took out a $200-million loan with forged papers. The Swiss government asked the U.S. Attorney’s office here in South Florida to assist in their probe, because they felt the loan was made under fraudulent terms. To me, that would be an indication that I should look deeper.”

Why didn’t Bush or someone on his staff look deeper? The former governor wasn’t a novice. He had been involved in commercial real estate in South Florida, was the director of a business-consulting firm and he was sitting on five other corporate boards. How did he end up on the board of directors of a corporate Ponzi scheme—or so InnoVida is described in the 21-count federal indictment of Osorio and his Chief Financial Officer Craig Toll.

According to the indictment, “newly collected investor money was being used to pay annual returns on interest payments promised to investors and to repay investors’ principal in order to create the false and fraudulent impression that InnoVida was successful and profitable.”

“An air of legitimacy”

Bush is not mentioned in the indictment that sent Osorio to prison for 12-and-a-half years. Nor is there any suggestion that he was culpable of criminal wrongdoing.

But a Securities and Exchange Commission lawsuit filed against InnoVida and Osorio in 2013 alleges that Bush was brought on “to add an air of legitimacy to InnoVida,” which “helped Osorio raise approximately $16.8 million from at least five investors.” More than half that money, according to the complaint, was used by Osorio to pay for private homes in Florida, Colorado and Switzerland.

The fraudulent financial statements detailed in the SEC complaint should have set off alarms for Jeb Bush and the other board members.

Osorio and his CFO created one financial statement showing that InnoVida had more than $35 million in cash and more than $100 million in equity, both of which were not true.

Osorio informed one prospective investor that InnoVida was valued at $50 million and another that it was valued at $250 million. Neither statement was true.

In March 2009, one financial statement listed “more than $35 million in cash and cash equivalents” while there was only $185,000 in company accounts.

InnoVida executives used fraudulent statements to lure investors who were solicited at board meetings. After one meeting, “an investor subsequently increased his investment and a potential investor made his initial investment based on the fraudulent financial statements.”

Cash value and equity, according to the SEC complaint, were adjusted as needed on paper to lure investors. During a September 2009 board meeting, for example, prospective investors were told the company was valued at $250 million, although InnoVida’s most recent evaluation in December 2008 was for $20 million.

“I saw their books,” Nunez said in a phone interview. “And I’ll put ‘books’ in quotes. Their books were forged. I took an accountant to look at them. When we saw their numbers, we knew that they were a crock of you-know-what.

“Now I can’t imagine someone who has been in government, in the public sector, then in the private sector, having performed any kind of due diligence and concluded that this company was legitimate.”

Nunez wouldn’t disclose the names of his clients. According to bankruptcy filings, two of his clients were NBA power forward Carlos Boozer and his former wife, Cindy, listed as unsecured creditors in bankruptcy proceedings while suing InnoVida for $6 million.

“My clients did not rely per se on board members having done their due diligence,” Nunez said. “Having said that, I can’t imagine anyone looking at the company and saying Governor Bush is on the board, General Wesley Clark is on the board and thinking this is anything but a seal of approval. This was an all-star cast of board members.”

Miami attorney Abbey Kaplan represented a client who invested $6.3 million in the company, then loaned Osorio $1.7 million, according to court records.

In 2011, Kaplan told the Miami Herald that Osorio used his board members to attract his client. “Osorio used his apparent wealth, connections and success story to lure him in. A who’s-who was listed as his board of directors:Wesley Clark, Jeb Bush [Miami condo developer] Jorge Perez.”

In a telephone interview, Kaplan told me his client’s claim was stayed when InnoVida went into bankruptcy. “Unsecured creditors are the last to get paid,” Kaplan said.

(Among the list of unsecured clients in the Chapter 11 filings was the Overseas Private Investment Corporation, a federally-backed agency that lost $3 million, the first installment of a $10-million loan to InnoVida.)

Bush repaid $270,000 of $468,901 he had earned as a consultant between 2007 and 2010. He stipulated in court documents that he was voluntarily surrendering the funds to the court and had not been compelled to repay them.

The discovery process in shareholders’ suits filed against Osorio and InnoVida ended when bankruptcy proceedings began, so Bush’s compensation as a board member was never revealed to shareholders or other creditors. Nor do documents explain why Bush repaid less than half the money he received from InnoVida.

As the company was never profitable and constantly solicited new investors, all of its money was investors’ money.

A front-row seat

A spokesperson for Bush did not respond by deadline to emails or phone calls regarding InnoVida. But as Bush begins to eclipse Chris Christie as the moderate Republican alternative in the 2016 race, questions will persist.

Was the former governor of Florida in the room when Claudio Osorio wildly overstated the value of the company to secure millions from an investor who lost everything? Did it occur to Bush to inquire about a multimillion-dollar investor from a Middle East sovereign-wealth fund who never existed? Did Bush ask how company value increased from $20 million to $250 million in nine months in 2009?

Perhaps his staff bungled what should have been a simple background check on Claudio Osorio, thus missing his first shakedown of investors. But according to documents on file in state and federal courtrooms in Florida, what happened the second time around, in InnoVida’s corporate board room, put two men in jail and destroyed tens of millions of dollars in shareholder wealth.

And Jeb Bush either had a front-row seat to a corporate scam or he ignored his duty to the shareholders he represented on a corporate board.